Dr Reddy's Laboratories - Robust quarter ahead; Buy - Anand Rathi

Strong quarter. We expect 20.8% yoy revenue growth, led by strong growth in its US generics, Russia and India businesses. EBITDA margin is expected to improve 280bps yoy, to 23.3%, mainly on account of strong growth in revenues from US generics and Russia & CIS. We expect adjusted PAT to increase 39% yoy, mainly led by strong revenue, margin expansion and higher other income.

US, Russia key growth drivers. We estimate US revenues to grow at 28% yoy to US$227m in 3QFY14, representing huge growth of 47.6% yoy in INR terms. This growth would be driven by recent launch of Dacogen, Vidaza, Depakote ER and Accutane. We estimate muted growth of 10% yoy in its domestic generics, due to impact of new drug pricing policy and slowdown in the industry. Russia & CIS geography is expected to continue to witness strong growth momentum with 20% yoy increase in revenue. The PSAI segment is expected to report modest 5% yoy rise in revenue on a high base.

Product launches encouraging. We expect growth momentum to continue in the near-to-mid term, led by launches and market share gain in key products in the US market such as Toprol XL, Azacitidine, Zometa, Accutane, Reclast, Dacogen, Vidaza, Depakote ER etc. We believe that higher revenue from these products and market share gain in key products, along with a favourable currency scenario, would lead to better profitability.

Our take. We expect Dr. Reddy's to report strong 20.8% yoy revenue growth, led by strong growth in its US, Russia and India generics. Its adjusted PAT would increase 39% yoy, chiefly led by better margins and strong revenue. We remain positive on near-to-mid term growth outlook, considering niche product launches in the US market. The stock is currently trading at 18.5x FY15e and 16.7x FY16e earnings. We maintain Buy, with price target of Rs. 2,746 based on 20x FY15e earnings. Risks. Currency fluctuations, regulatory hurdles.

Source : Equity Bulls

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